The Arizona Legislature tried in 2011 to improve the fiscal health of two ailing public-employee pension systems and ease the burden on taxpayers with a series of changes.

Lawmakers suspended cost-of-living raises, made future pension increases reflect the health of the retirement funds, and required current workers to contribute more toward their future retirement benefits.

Members of those state retirement systems sued, claiming the changes violate the state Constitution.

Active and retired judges, members of the Elected Officials’ Retirement Plan, were the first to file suit, followed by active and retired police officers on behalf of the Public Safety Personnel Retirement System. Firefighters did not join the litigation.

The changes to the pensions are in effect as the judges’ lawsuits work their way through the courts. The public-safety suits, meanwhile, are on hold in Maricopa County Superior Court to await an outcome in the judges’ cases.

The matter is being litigated as policy makers struggle with public-pension costs: The public-safety-pension system costs more than $300 million annually to fund, a sixfold increase from a decade ago. The additional costs and the impact of the recession have slowed the hiring of police officers and firefighters statewide, adding to the system’s financial woes as fewer new employees contribute to the fund.

The Elected Officials’ Retirement Plan is costing taxpayers more than $21 million a year.

As in some other states, Arizona lawmakers are hard-pressed to find a solution short of facing down public employees in court. The only other option, one being contemplated by some lawmakers, is a constitutional amendment that ends protections for all public-employee pensions.

The Arizona Supreme Court on June 4 will hear arguments on whether lawmakers could lawfully suspend cost-of-living raises for retired judges. The lower court ruled that the change was unconstitutional.

If the high court rules in favor of the judges, the decision will negate legislative changes in benefits made to both pension systems, said Jim Hacking, administrator for both trust funds. The changes were made to hold benefits in check because both systems are severely underfunded.

If guaranteed benefit increases continue, there will be additional costs for taxpayers.

“The picture is not good,” Hacking said.

Lawmakers say that if the state Supreme Court invalidates the pension reforms they put in place in 2011, they are poised to take the issue to voters in 2014.

“The financial situation is dire,” said state House Appropriations Chairman John Kavanagh, R-Fountain Hills. “The taxpayers are on the hook because of the Constitution.”

Kavanagh said he and others may ask voters to amend the Arizona Constitution to make it easier for the state to alter public-pension benefits.

“We made some very modest and reasonable changes to the pension systems,” Kavanagh said. The plan is to “sit down in a strategy session with the Senate” and devise a plan for a measure to be placed on the 2014 ballot, he said.

State protections

Arizona, as a right-to-work state, is not considered friendly to public employees or unions. But it has one of the nation’s strongest constitutional protections for public pensions. Voters in 1998 amended the Arizona Constitution to say “public retirement benefits shall not be diminished or impaired.”

The lawsuits focus on that provision as well as federal contract law.

The provision protecting public pensions in Arizona’s Constitution is something most other states don’t have,said Phoenix attorney Jennifer Kroll, who practices labor and employment law.

“In Arizona, the view is you made the contract when you started employment,” Kroll said. “In other states, it’s not necessarily the case.”

Public-safety advocates argue that there is another good reason not to take away their public benefits: It could affect recruitment.

“This is a dangerous job, and if we ... make the reward aspect diminish, we will have fewer people applying and we will have less qualified applicants,” said John Ortolano, an Arizona Department of Public Safety sergeant and president of the state Fraternal Order of Police.

Arizona law does not give the same pension protection to workers in the private sector, where many employers have stopped offering pensions. Most instead offer 401(k)-type retirement plans that are less costly and fluctuate with the performance of their investments.

Byron Schlomach, an economist with the conservative Goldwater Institute who has studied public pensions, said he’s not convinced a change to the state Constitution would bolster lawmakers’ ability to address current public-pension costs.

“Even if we change the Constitution, there is a risk that someone could successfully sue and say, ‘Even though the voters changed the Constitution, I should be protected by the old constitutional guarantees because this is a contract issue,’ ” Schlomach said. “So, we seem to be between a rock and a hard place.”

If Arizona loses in court, Schlomach said, the state should, at the very least, put new hires into a less costly defined-contribution plan, similar to a 401(k). In such a system, employees and employers contribute a set amount to a retirement account that grows or diminishes based on the performance of the fund’s investments without any guarantee on the size of the ultimate benefit.

Arizona public employees have a defined-benefit plan in which both the employee and employer make contributions to a pension trust that guarantees a specific retirement benefit based on years of service and ending salary, regardless of how invested funds have performed.

David Draine, a senior researcher who specializes in public pensions for the Pew Charitable Trusts, said states such as Minnesota and Florida have implemented pension reform and won their battles in court. Making changes for prospective employees, who do not yet have contract rights, would be more simple than a constitutional amendment, he said.

Caroline Pilch, an attorney representing the police officers, said her clients wouldn’t have a problem with that.

Scottsdale, which contributed nearly 450 percent more in fiscal 2012 than it did in fiscal 2003 to the retirements of its police officers, has explored moving all current or future employees from state public-pension plans to a 401(k)-style plan.

But the concept never gained traction in the face of an adverse legal opinion, said Scottsdale Mayor Jim Lane, a retired accountant.

“There are some very serious obstacles in trying to move away from that system,” he said.

Former Scottsdale Councilman Ron McCullagh pushed for the city to consider withdrawing from the state’s pension systems. He believes all public-pension plans should be converted to 401(k)-type plans.

“Any proposal to amend Arizona’s Constitution should mandate that change — and given the chance, voters would do it in a heartbeat,” McCullagh said.

He argued that an amendment “to alter but retain the existing plan is little more than political window dressing” to protect elected officials who benefit under the existing plan.

Pressure stalls bill

The Legislature this year has tried putting new elected officials into a less-costly defined contribution, or 401(k)-style, plan instead of the Elected Officials Retirement Plan, which is the most generous in the state.

The bill passed the House but stalled in the Senate amid pressure from key judges, including Arizona Supreme Court Chief Justice Rebecca White Berch.

Berch, who could be involved in a ruling on the constitutionality of the 2011 pension-reform laws, urged a Senate committee in March to increase court fees so future judges could continue to receive guaranteed public-pension benefits and not move to a 401(k)-style plan.

She also urged lawmakers to craft such a deal in private, outside public hearings.

State Sen. Steve Yarbrough, who pushed through the 2011 pension-reform law, said “the irony didn’t escape me” when Berch testified before his Finance Committee in March. He said it is extremely rare for a chief justice to appear on any issue before a legislative committee.

When asked at the time if testifying was a conflict of interest because she might hear the pension-reform case regarding fellow judges, Berch initially declined to answer, then asked a reporter rhetorically, “Are all pension issues the same?”

Berch declined to be interviewed for this story.

Jennifer Liewer, a spokeswoman for the court, said the justice’s testimony did not relate to her retirement or that of any other sitting judge.

The chief justice plans to address the litigating parties after a hearing to see if they have concerns about her impartiality, Liewer added.

She will then “take this and other factors into account in deciding whether she should recuse herself on this case,” Liewer said.

Ruling awaited

In the lawsuits against the state, current and retired judges — like current and retired police officers — claim that the 2011 pension-reform law was illegal.

That law required them to pay more for their retirement benefits, temporarily suspended cost-of-living pension increases and adjusted a benefit formula for future cost-of-living adjustments.

One Maricopa County judge has ruled that changes to the cost-of-living raises for judicial retirees was illegal. The matter is now before the state high court.

In a second case, a different Maricopa County judge issued a ruling that distinguished between judges hired before and after 2000. He upheld legislative changes that increased contribution rates and amended the formula for benefit increases for those who went on the bench after 2000, when a vesting law went into effect.

The ruling is being appealed.

Ben Cooper, a lawyer for the pension plans, said the vesting ruling is significant because the majority of current judges came into the system after 2000, meaning they would have to pay more.

At the Capitol, where Republicans control both houses and the executive branch, there is no movement to make any additional changes to the Public Safety Personnel Retirement System until the state Supreme Court rules on the judges’ cases. Republicans also say there is not a lot of political will to again take on the pensions of police officers and firefighters.

“There would be more of a reluctance because you are dealing with people who are putting their lives on the line,” said state Rep. Phil Lovas, R-Peoria, who is a key sponsor to change the elected officials’ pension plan serving judges. “I have a real concern on changing the rules for those who are in.”

Matt Benson, a spokesman for Gov. Jan Brewer, said lawmakers should “stay the course and wait and see the conclusions of the legal action.”

“The state will continue to defend those pension reforms, and we believe the courts will uphold what we have done,” Benson said. “Once we get some finality to that legal action, we will have a better action plan on what course to take.

“What you need is balance,” he said. “There has to be a balance in protecting the taxpayers and holding up the government’s end of the bargain.”

PENSION REFORM IN OTHER STATES

At least 41 states, including Arizona, have enacted significant revisions to their state retirement plans since 2010, according to the National Conference of State Legislatures. Lawsuits have been filed in response to some of the changes. Here are some of the reforms:

Alabama: Increased employee contribution rates in two steps.

Colorado: Shifted burden from employers to employees of state government to fund statewide retirement system.

Florida: Required all members of the Florida Retirement System to make contributions of 3percent of salary and lowered employer contributions.

Hawaii: Raised contribution rates for government employees as well as firefighters, police officers and corrections officers.

Maine: Cost-of-living adjustments for retirees were temporarily frozen and then capped at 3percent in future years based on the Consumer Price Index.

Maryland: Increased employee-contribution requirements for most current and future members of state plans.

Rhode Island: Suspended cost-of-living adjustments for retirees until the pension system is funded at 80 percent.

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